It is very important for companies to correctly characterize their workers as independent contractors or employees. Failure or refusal to properly classify employees as “employees” can have serious financial repercussions.
- Since companies must withhold taxes and pay matching taxes on employees but not independent contractors, a finding that a company has treated an employee as an independent contractor creates an immediate tax liability for the company.
- Employee status brings workers under the protection of various wage and benefit statutes as well as federal and state anti-discrimination laws and laws establishing collective-bargaining rights for employees.
Example: An employee is fired because of her religion. This conduct would not violate Title VII of the Civil Rights Act of 1964 if the worker was an independent contractor. It would however, violate Title VII if the worker was considered an employee, and liability would include back wages owed to the employee plus compensatory and punitive damages. Also employers are not always subject to liability for torts committed by independent contractors.